Cashflow - trust verus ownership by individual

[wombat777]

How would cashflow be affected in a scenario where a property is owned by a trust instead of a private individual?

Assuming one individual is named in the trust deed, how would their private PAYG tax position be taken into account in calculating cashflow on the property.

( for example offseting depreciation on an Investment Property owned by the trust against the individuals PAYG income tax - or is this not possible because the individual and the trust are treated as separate taxable entities )

Sorry for what may be a dumb question. This is all very new to me.

 

[Paul@PFI]

Depends if its a discretionary trust or a unit trust. If its a UT it depends how units and loan is structured. Positive or negative geared ? Normally a disc trust wouldn't neg gear since losses are quarantined so there is no PAYG issue for a beneficiary.

CGT or regular rental income ?

I suspect you are asking about a DT but why would you use a DT if neg gearing is the issue ? A deed that names one potential beneficiary doesn't mean they are a sole beneficiary. Typically the deed will include others who are referenced to that person ie spouse, parents, relatives, trusts, companies etc...

Also you are asking about cashflow but the trust distribution isn't based on cashflow. Its based on net trust income ie after depreciation etc. Its possible to have positive income and losses in a trust but that wont help the beneficiary with PAYG.

 

[Terry_w]

It will also depend on whether the trust has other income - perhaps from a distribution from a related trust.

 

[wombat777]

Part of the reasoning for the trust is asset protection due to the industry I work in.

I checked with my accountant and apparently a trust won't work in my situation ( I am single ). I would need to be shareholder, director and beneficiary ( apparently this is not possible ). I would need to appoint someone else as director which means someone else would have control of my assets.

 

[Terry_w]

Part of the reasoning for the trust is asset protection due to the industry I work in.

I checked with my accountant and apparently a trust won't work in my situation ( I am single ). I would need to be shareholder, director and beneficiary ( apparently this is not possible ). I would need to appoint someone else as director which means someone else would have control of my assets.

You should be seeking this advice from a lawyer, not an accountant. Why would you need another person as director?

 

[wombat777]

I'm interested in trusts primarily for future flexibility if my family situation ever changes ( I am currently single ).

Does anyone have some sample projections available that show the difference in acquisition costs and cashflow including income and land tax effects for Individual versus structuring in a trust?

This is for cashflow positive or near-neutral with individual properties held by a Corporate Trust ( company ) as trustee for a fixed unit trust. Assume a single unit holder.

 

[GreyGhost]

I'm interested in trusts primarily for future flexibility if my family situation ever changes ( I am currently single ).

Does anyone have some sample projections available that show the difference in acquisition costs and cashflow including income and land tax effects for Individual versus structuring in a trust?

This is for cashflow positive or near-neutral with individual properties held by a Corporate Trust ( company ) as trustee for a fixed unit trust. Assume a single unit holder.

Is the unit holder a discretionary trust?

 

[Paul@PFI]

I'm interested in trusts primarily for future flexibility if my family situation ever changes ( I am currently single ).

Does anyone have some sample projections available that show the difference in acquisition costs and cashflow including income and land tax effects for Individual versus structuring in a trust?

This is for cashflow positive or near-neutral with individual properties held by a Corporate Trust ( company ) as trustee for a fixed unit trust. Assume a single unit holder.

They may be identical if structured correctly.

 

[Mry]

How would cashflow be affected in a scenario where a property is owned by a trust instead of a private individual?

I assume you mean discretionary / family trust. There are many types.

Taxable loss in trust - Income (Rent) - Expenses with no other adjustments. Tax loss will most likely be carried forward.
Taxable profit in trust - after the losses are claimed in full (if any), cashflow wise it would no different from owning in your own name (Income - Expenses + tax on income) but you can distribute the profits to others, especially those on a lower income. That should reduce the overall tax burden.

Assuming one individual is named in the trust deed, how would their private PAYG tax position be taken into account in calculating cashflow on the property.

The person who receives the taxable income from the trust would have their PAYG affected by the amount of the distribution, as long as it exceeded the PAYG instalment threshold. (If there was one person on the deed, that's a pretty bad trust deed.)

( for example offseting depreciation on an Investment Property owned by the trust against the individuals PAYG income tax - or is this not possible because the individual and the trust are treated as separate taxable entities )

The trust claims every single expense relating to that rental property including depreciation. The individual would merely receiving the taxable distribution from the trust (ie John received a taxable distribution of $2,000 from the ABC trust). That's it.

If you wanted to know a bit more about the effects on a hypothetical basis, you can use Ian Somers Property Analysis tool.
http://www.somersoft.com.au/software.htm

 

[Peter_Tersteeg]

In most cases the cash flow impact of purchasing through a trust is not significant to most people.

For asset protection purposes, most people use a discressionary trust which is not one you can generally apply negative gearing against your personal income. This does have an affect of cash flow.

That said, gearing benefits isn't something I'd advise people to rely on when determining their budget, it's better to be considered as a bonus. As a result I'd suggest the cash flow implications of purchasing via a trust are minor.

In most people circumstances, the gearing benefits are nice but they don't make a critical difference to their own perceived affordability. If you're relying on the gearing benefits, you're probably stretching your budget further than might be prudent.

 

[Mry]

Generally speaking, the low interest rates at the moment make the cashflow considerations on buying a trust vs an individual minor. If interest rates go up, that could change. I did the calculations for someone today on a rental property at $400,000 at 100% leverage with an interest rate of 5.1% vs 7.1% and their out of pocket expenses before tax went from $7,516 per year to $15,836, with the potential refund going from $3,486 to $6,648. Missing out on that refund if that ever occurs because you bought in a trust could be painful.

 

[Paul@PFI]

The trust claims every single expense relating to that rental property including depreciation.

Not always true. In a unit trust the best manner is for the unitholder to borrow...NOT the trustee. That means there is no loss quarantine, no PAYG issue for unitholders.

And a refinance of units can be done so that the unitholder can access deductible loans interest to pay for non-deductible outgoings like paying down their own home.

Or a change of beneficial ownership of the property without duty.

 

[coastymike]

or transfer to the units to an SMSF at a later stage. Something that can't be done when resi property is held in an individual name or in a discretionary trust.

 

[Terry_w]

This is for cashflow positive or near-neutral with individual properties held by a Corporate Trust ( company ) as trustee for a fixed unit trust. Assume a single unit holder.

If the individual person is the unit holder and borrowing to buy the units, then it will be almost exactly the same, except there may be an annual asic fee of $243 and an extra cost for the tax return for the trust - a few hundred.

You may ask why bother?

Because of flexibility to
1. transfer units to a SMSF at a later date
2. transfer units to a related party - spouse, discretionary trust, child etc who could then
a) take over ownership = no stamp duty or much much less than transferring title
b) borrow to acquire the units = releases cash for you to pay down your non deductible debt with the new owner being able to claim the interest as a deduction.
c) asset protection is greatly enhanced if a discretionary trust buys the units for full market value.

 

[Mry]

Not always true. In a unit trust the best manner is for the unitholder to borrow...NOT the trustee. That means there is no loss quarantine, no PAYG issue for unitholders.

:Facepalm:

Sorry, was assuming it was a discretionary trust, just saw it was a unit trust.

 

[DaveM]

You may ask why bother?

Because of flexibility to
1. transfer units to a SMSF at a later date
2. transfer units to a related party - spouse, discretionary trust, child etc who could then
a) take over ownership = no stamp duty or much much less than transferring title
b) borrow to acquire the units = releases cash for you to pay down your non deductible debt with the new owner being able to claim the interest as a deduction.
c) asset protection is greatly enhanced if a discretionary trust buys the units for full market value.

Plus in some states, a partial or full land tax threshold per trust.

 

[wombat777]

If the individual person is the unit holder and borrowing to buy the units, then it will be almost exactly the same, except there may be an annual asic fee of $243 and an extra cost for the tax return for the trust - a few hundred.

You may ask why bother?

Because of flexibility to
1. transfer units to a SMSF at a later date
2. transfer units to a related party - spouse, discretionary trust, child etc who could then
a) take over ownership = no stamp duty or much much less than transferring title
b) borrow to acquire the units = releases cash for you to pay down your non deductible debt with the new owner being able to claim the interest as a deduction.
c) asset protection is greatly enhanced if a discretionary trust buys the units for full market value.

Thanks Terry. It would be useful to see some side-by-side projections that provide comparisons for all the factors that come into play, including setup/acquisition costs (trust setup, stamp duty), yearly costs, tax effects ( in particular land tax ) for a portfolio with a number of properties.

Also scenario comparisons for when properties are sold or transferred, including capital gains treatment, duty, etc.

Perhaps something you could add to your e-book.

 

[Terry_w]

I've tried to compare a few times in the past but there are to many variables, especially with discretionary trusts. The range of potential beneficiaries and their potential levels of income is huge for example

 

[wombat777]

I've tried to compare a few times in the past but there are to many variables, especially with discretionary trusts. The range of potential beneficiaries and their potential levels of income is huge for example

Agree. Perhaps a few simple scenarios for people in different life stages. Would certainly help with understanding.